Shaking the “Rotten Apple” Image in Ukraine

Since 2005, the Eastern Europe and Central Asia region leads the world in enhancing the business climate for local firms. The region overtook East Asia and the Pacific to become the second most business-friendly, after OECD high-income economies. However, one country, the Ukraine, has been described as the “rotten apple” in the region, comparing unfavorably to its neighboring countries. After meeting the “Ambassador Extraordinary and Plenipotentiary of Ukraine to the United States,” I decided to take a closer look.

A good place to start is always the data. The latest IFC and World Bank Doing Business report indeed finds that, over the past year, Ukraine became one of the top reformers in terms of improved business regulations. Ukraine’s reforms in company incorporation, taxes, and property transfer are big achievements that look rather simple and common sense once already in place: eliminating the minimum capital requirement for incorporation, eliminating the requirement to have incorporation documents notarized, implementing electronic filing and payment for medium-size and large enterprises, and introducing a time limit for the “land cadaster” in Kiev to process property transfer applications.

On top of this top-down progress, there are also results. Around the same time this report on Ukraine’s reforms was published in October 2012, news of the biggest deal in the Ukrainian Internet history came out: Google paid an estimated $30+ million to buy Ukrainian start-up Viewdle. This startup’s face and object detection system was already widely used in search technology. For example, in 2011, Google launched a “search by images” service using this technology. Yuriy Musatenko and Yegor Anchishkin founded Viewdle after detecting commercial prospects in the development of image recognition technology at the Kiev Institute of Cybernetics. They received angel investment from the Ukrainian diaspora in the United States. At the moment of the sale, the startup had grown to 34 employees.

However, despite all this encouraging news surrounding Ukraine’s startup ecosystem, the big challenges are far from over for local entrepreneurs. Augusto Lopez-Claros, Director of Global Indicators and Analysis at the World Bank said, “While we are encouraged by Ukraine’s regulatory improvements in the past year, local entrepreneurs still spend hundreds of days awaiting the outcome of standard business procedures.”

Ukraine ranks among the bottom 20 percent of economies in half of the 10 areas of regulation measured by the Doing Business report. Its lowest score comes in dealing with construction regulations, where it ranks third to last. On the overall ease of doing business, Ukraine ranks 137th among 185 economies, behind its neighbors the Slovak Republic (46), Poland (55), Belarus (58), Romania (72) and Moldova (83). Corruption, monopolistic policies and the lack of a supportive culture are all remaining roadblocks for Ukraine to build a sound startup ecosystem. These regulatory challenges are exacerbated by a negative perception of the political climate as expressed for example in the Global Entrepreneurship Week 2012 Policy Survey.

Looking to the future, there are two developments of note in assessing the likelihood of further helpful top-down reforms and healthier bottom-up startup communities. First, while in many countries protest is a cause for anxiety, for Ukraine it may not be so problematic. The mobilization by private entrepreneurs over the past five years was instrumental in ushering through the recent tax measure changes which in turn will likely spur further progress in helping Ukraine cut red tape and change its perception as a nation with a very unfavorable business environment compared to its neighbors.

I am grateful to Olexander Motsyk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the United States for suggesting we take a closer look at his country. With a title that suggests he is both “extraordinary” and has “full powers,” how could I not?